The UAE hosts a significant concentration of shipping and commodity trading businesses, for which charter arrangements are a standard commercial tool. As a result, the VAT treatment of such arrangements is of particular importance.
While a voyage charter, under which the shipowner undertakes to transport specific cargo between agreed ports, is clearly classifiable as a transportation service for UAE VAT purposes, the VAT treatment of time charters presents a materially more complex classification question.
The source of this uncertainty lies in the way time charters operate in practice, which can make them appear, at first glance, similar to a lease or supply of a means of transport. In particular, three commercial features of a time charter often give rise to confusion:
- Commercial control by the charterer: Under a time charter, the charterer typically determines the vessel’s trading routes, ports of call, and employment during the charter period. This level of commercial direction can create the impression that the charterer has control over the vessel itself.
- Idle periods: A vessel under time charter may remain idle for part or even all of the charter period, while hire continues to be payable. This can resemble a lease arrangement where consideration is paid irrespective of actual usage.
- Direct cost-bearing by the charterer: Charterers commonly bear significant voyage-related costs, such as fuel, port charges, canal dues, and other operational expenses. This cost allocation can further blur the distinction between a transportation service and the supply of a vessel.
Taken together, these features raise legitimate questions as to whether a time charter should be characterised as a transportation service or as the supply of a means of transport for VAT purposes. This article explores that question by analysing the legal structure and economic substance of time charters under UAE law and by reference to international and GCC practice.
Legal Nature of a time charter under UAE Maritime Law
Article 150 of the UAE Federal Decree Law No. 43 of 2023 (“Maritime Law”) defines a time charter as below:
“1. Time Charter is a contract whereby the shipowner undertakes to put at the disposal of the charterer a specific seaworthy ship equipped with the provisions, needs and seafarers for a fixed period of time, in consideration of a freight to be agreed upon between the parties to the charter party.
The shipowner shall put at the disposal of the charterer at the agreed-upon place and time a specific seaworthy ship and equipped with the necessary provisions and seafarers as required to enable the charterer to exploit the ship as mutually agreed under the charter party, and shall keep the ship in such a condition throughout the agreed-upon charter term.”
The Maritime Law confirms that under the time charter:
- The vessel is supplied together with crew and provisions necessary for exploitation of the vessel,
- The shipowner retains responsibility for seaworthiness, and
- The shipowner must maintain the vessel’s condition during the charter period.
Accordingly, a time charter is legally not a bare vessel arrangement, nor a mere lease of an asset. It is a contractual framework under which the charterer obtains access to transportation capacity, while possession, crewing, and technical management remain with the shipowner.
Characterisation under UAE VAT Law
For UAE VAT purposes, the characterization of a Time Charter should follow its legal and economic substance.
Article 34(2) of VAT Executive Regulations, provides that supply of means of transport, i.e. a ship designed or adapted for use for commercial transportation of passengers and goods, would be subject to VAT at 0%. Further, Article 30(4) of VAT Law provides that the place of supply of means of transport shall be where “such means of transport were placed at the disposal of the lessee.”
It follows from the above provisions that the term “supply of means of transport” refers to the supply of the means of transport as such, i.e. the vessel alone, which is designed/ adopted for commercial transportation. It does not refer to the provision of transportation capacity supported by ongoing operational services.
Under a time charter:
- The supply is not limited to the vessel alone;
- The shipowner supplies a fully crewed and operational ship;
- The charterer does not obtain possession or command of the vessel but merely the right to commercially employ the transportation capacity.
Accordingly, the legal and economic substance points toward a transportation service, rather than a lease or supply of a means of transport.
The following features do not alter the VAT characterisation of a time charter:
- The charterer’s ability to determine routes or ports of call;
- Periods during which the vessel remains idle; and
- The charterer bearing certain voyage-related costs (e.g. fuel).
These factors relate to the commercial deployment of transportation capacity and do not result in any transfer of possession, command, or complete control of the vessel to the charterer. Throughout the charter term, crewing, technical management, seaworthiness, and compliance with applicable maritime and regulatory requirements remain the exclusive responsibility of the shipowner.
VAT classification depends on the legal and economic nature of the service supplied, rather than on the cost-bearing arrangements, or the extent to which transportation capacity is actually utilized. Accordingly, none of the above factors convert a Time Charter into a lease or supply of a means of transport, and a Time Charter remains appropriately classifiable as a transportation service for UAE VAT purposes.
International and GCC practice
Since the UAE VAT Law, Executive Regulations and FTA Guides do not explicitly deal with or clarify VAT treatment of Time Charters, we investigated how it is treated internationally, in other jurisdictions and also specifically in GCC Countries.
1. OECD: Para 5 of Commentary to Article 8 of OECD Model Tax Convention states that “Profits obtained by leasing a ship or aircraft on charter fully equipped, crewed and supplied must be treated like the profits from the carriage of passengers or cargo”. This recognizes that Time Charter providing for supply of equipped and crewed ship is equivalent in substance to transportation/ carriage activities.
2. Thailand: Thailand Revenue Department’s clarification dated October 21, 2022, sets out that in a Time Charter:
- The master and crew remain employees of the shipowner.
- Control, possession, and command of the vessel remain with the shipowner.
- The charterer bears fuel costs, as the charterer may direct the vessel to any location and fuel costs cannot be determined in advance.
- If the charterer fails to pay hire, the shipowner has the right to withdraw the vessel from service.
- The vessel is not transferred to the charterer in an absolute or complete manner.
Based on the above, it was concluded that Time Charter does not constitute a lease of the vessel but remains a contract for the carriage by sea.
3. Australia: In Tax Ruling 2003/2, the Australian Taxation Office (ATO) has, explained Time Charter in this way: “Time charterparty - Like a demise charterparty, the shipowner is placing its ship for an agreed time at the disposal of the charterer who is free to employ the ship for its own purposes within the permitted contractual limits of the charterparty. Unlike a demise charterparty, a time charterparty involves a division of the ship's management. The charterer controls the commercial function of the ship and is therefore responsible for the expenses of such activities. The shipowner retains possession of the ship through the control it has over the master and crew who remain in the employment of the shipowner. The shipowner is responsible for the navigation and general management of the ship through the master and crew. The charterer has the ship at its disposal for a specified period of time for the purpose of transporting its own goods”.
After analysis of the case law and relevant shipping law textbooks, the ATO ruled that: “while it can be said that a charterer, in a sense, has the use of the ship - in the sense that the charterer has the use of the carrying capacity of the ship - the true nature of a time charter is generally acknowledged to be the provision of transportation services by the owner to the hirer.”
4. United Kingdom: In Internal Manual No. VATPOSS11400, the UK’s HMRC states that “where the supply is of a ship or aircraft with a crew under a charter contract the supply is first and foremost the supply of the hire of a means of transport; however, we will permit the supply to be treated as transportation if the parties to the charter wish it to be”.
Further, in VTRANS110310 (Chartering: Meaning of “charter”), HMRC explains that the principle of classification is as below:
- “Where a supplier A supplies a means of transport with a crew to a customer B who in turn supplies a transport service to a third party C, the supply by A to B will be the hiring of a means of transport and the supply by B to C transport.
- Where a supplier A supplies a means of transport with a crew to a customer B and undertakes to transport that customer or any person designated by that customer and/or his goods; other than where that customer is making the supply of transport services themselves then that is the supply of a transport service from A to B”.
The Manual also notes that “historically HMRC accepted that where a ship or aircraft was supplied under a charter/hire agreement with a crew and the supply involved transport then the supplier and customer should reach an agreement as to whether the supply should be considered as a supply of a means of transport or a supply of transport.”
Accordingly, under UK VAT rules, where a means of transport with crew is provided under a time charter to a customer that subsequently uses the vessel to perform transportation services for its own customers, the default classification is the supply of a means of transport.
However, HMRC has expressly confirmed that, where the parties agree to characterize the time charter as a supply of transportation services, such classification will be accepted. This approach reflects a pragmatic administrative position rather than a pure substance-based analysis and highlights that contractual drafting and agreed characterisation can materially influence VAT treatment.
5. GCC Member States: The practice of GCC member States is relevant since all GCC countries aim to implement the Common VAT Agreement of the GCC States. Further, in Judgement of 20 September 2023 on Appeal No. 1006 of 2022, the UAE Federal Supreme Court’s even recognised that the UAE and Saudi Arabia have already implemented this Agreement.
The Agreement mentioned above “aims to establish a common legal framework for the introduction of a general tax on consumption in the GCC known as (VAT) levied on the import and supply of Goods and Services at each stage of production and distribution”. In practice, this gives a sound reason to fill a gap in the guidance in one GCC member with existing guidance from another.
Governed by these considerations, we found the below:
- Saudi Arabia
As per Article 34 of the Saudi Arabia VAT Executive Regulations, international transport of goods and passengers (clauses 1 and 2), and supply of means of transport for international transportation of passengers and goods (clause 4) are treated as two distinct supplies.
Article 34(7) defines “International Transport” as “the provision of a transportation service by means of a vehicle, aircraft or vessel together with a driver or pilot and with a crew where necessary for the purpose of that service, provided that the transportation service involves transport of Goods or passengers either to a place outside the Kingdom, or from a place outside the Kingdom into the Kingdom”.
Qualifying Means of transport as per Article 34(8) is defined inter alia as any vessel adapted to carry a minimum of ten (10) people, or designed to carry Goods on a commercial basis.
The above demonstrates that where a vessel is supplied together with crew, the supply is to be characterized as a transportation service. It further demonstrates that supply of a means of transport is limited to arrangements involving the transfer of the vessel itself (such as bareboat chartering), which is designed for commercial transportation.
- Oman
As per Section 6 of the Oman Tax Authority’s VAT Taxpayer Transportation Guide, supply of crew members for operation of means of transport along with and as part of lease of the means of transportation is treated as supply of qualifying means of transportation.
- Bahrain
Section 5.1 of NBR VAT Transportation Guide provides that “the provision of crew along with the supply of the qualifying means of transport (essentially a “wet lease”) will also qualify for the zero-rate provided the functions of the crew relate to operating and/or maintaining that qualifying means of transport or ensuring the safety of the passengers or goods intended to travel on that qualifying means of transport. The crew must be provided by the supplier of the qualifying means of transport in order for the zero-rate to apply; the provision of crew by a third party, even if that party is connected with the supplier of the qualifying means of transport, will not qualify for the zero-rate under Article 68 of the Executive Regulations (unless both parties are part of the same VAT group).”
This guidance demonstrates that, under Bahrain interpretation, the charter of a vessel together with crew responsible for its operation and maintenance is treated as a supply of a qualifying means of transport.
The foregoing analysis demonstrates that there is no uniform or settled approach among the tax authorities of GCC countries, nor across other jurisdictions, with respect to the VAT treatment of Time Charters.
Findings and practical implications
On a proper analysis of the legal and economic substance of a time charter, and having regard to the wording of the UAE VAT Law and Executive Regulations as well as the interpretative guidance reflected in the OECD Model Tax Convention Commentary, characterising a time charter as a supply of transportation services represents the more legally coherent and defensible interpretation for UAE VAT purposes.
That said, in the absence of explicit statutory provisions or published guidance from the FTA specifically addressing the VAT treatment of time charters, a residual risk remains that an alternative characterisation, as a supply of a means of transport, could be adopted. In this context, seeking a private clarification from the FTA is a prudent risk-management step to secure certainty, support consistent VAT treatment, and mitigate potential exposure in the event of audit or dispute.
Disclaimer
Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.
The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.
You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.
